Should You Sell to a Cash Offer Off-Market As Is? "Patterns of Parasitic Purchasing" Per Drexel.Edu
- Adam Garrett
- Jul 13, 2023
- 14 min read
Updated: Jun 13
You may have seen the "We Buy Houses!" signs, received postcards from them, received calls from them, or received texts from them. I have received many of each for my own rental property, despite being a real estate agent. If you haven't yet, you probably will soon if you become a homeowner. In this article, I wanted to go into why to disregard these almost entirely, & how you can have peace of mind that if you sell with a real estate agent, you wouldn't be losing out vs one of these buyers.
"Patterns of Parasitic Purchasing": Just How Much Less Will Sellers Sell For According to Drexel University Research Lab? "less than half the value they would by using traditional methods."
According to a great article by Governing.com on the subject:
For the full report, which researched Philadelphia, PA; Jacksonville, FL; & Richmond, VA, go here. Here are some quotes from the executive summary on page 4:
"striking patterns of parasitic purchasing comes into view (4)."
"Not all capital is the same. The subprime mortgages in the early- and mid-2000s flooded certain neighborhoods, disproportionately communities of color, with predatory capital. This wasn’t a lack of capital –it was access to toxic capital that was targeted to people and places where the damage of the capital was arguably worse than no capital at all... the current moment is being met with parasitic, rather than beneficial, capital (7). "
The summary article, titled, "WE BUY HOUSES”: YOU LOSE OUT" states, "some long-time homeowners may not know how much their house has appreciated; flippers, wholesalers, and iBuyers can exploit that lack of knowledge by offering quick and easy cash offers for less than what they would receive if they listed their house with a real estate agent."
"Less than half the value" appears to be regarding net proceeds. In terms of the gross price, a video from Econofin pitching investment into preforeclosures states that those properties are "often 15%-20% below market value."
Laws Created to Limit Predatory Practices Common Among "We Buy Houses" Investors in Philadelphia
Per Drexel.edu's report, "Philadelphia has instituted a “do not call” list explicitly for unwanted wholesale home buying offers."
Article by WHYY:
New Philly law cracks down on blockbusting ‘We Buy Houses’ solicitations
"Steep penalties against unscrupulous investors aim to protect homeowners from being pressured into below-market sales... In 1963, Philadelphia enacted the Fair Practices Ordinance (FPO), a civil rights law that included protections against racially exploitative “blockbusting.” This week, the city announced an expansion of the FPO to address a new version of this unscrupulous housing practice: cracking down on “We Buy Houses” and similar intimidation practices... Today, unscrupulous real estate investors have adopted similarly deceptive tactics in gentrifying Philadelphia neighborhoods. This time, residential property wholesalers — the so-called “We Buy Houses” scammers — have flipped the script.
They trick longtime Black homeowners in rapidly gentrifying neighborhoods into signing papers to sell their homes for far less than market value. These homeowners, typically older adults, may not know the true value of their home or face unbearable pressure from in-home salespeople. With the stroke of a pen, they can lose their home... "
Laws Suggested to Limit Predatory Practices Common Among "We Buy Houses" Investors
Per Drexel.edu's report:
1. "To target sales that occur outside the open market, states could enact rules requiring an outside, independent appraisal under certain trigger conditions (15)."
2. Cities should institute "a “do not call” list explicitly for unwanted wholesale home buying offers" like Philadelphia has.
Exclusion Clauses in Listing Agreements Can Give Sellers Peace of Mind That They're Not Leaving Money on the Table by Listing with an Agent
Most real estate agents, myself include, won't mind including an exclusion clause for someone like a we buy houses buyer in a listing agreement. That means that if the we buy houses buyer can get you a higher net than if you listed it on the open market with good marketing (which is extremely rare, but the clause can at least give you peace of mind), you'd be covered. It doesn't stop the we buy houses people from pressure sales tactics and other predatory practices if you did try to do something with them, but it would be a lot better than never trying a real estate agent at all in the vast majority of cases, where it's rare to actually get to the point with an exclusion clause in place where you would ever want to actually sell to that investor. Investors need to undercut the value too heavily for it to be worth their time to reach out to you for a little exclusion clause.
Why the We Buy Houses Have Time and Money to Reach out to You
They have the time or money to engage in these practices because of just how good of a deal they can get for a home using these tactics.
"We buy houses" style investors sometimes have others in other countries employed full time to just make calls 40 hours a week to sellers who don't really know what their home is worth. Some of the same people employ similar tactics by employing others with US area codes (no matter the country they are in) to text for 40 hours a week. Others send thousands of postcards, and won't stop until you ask them to stop or until you sell them your house or sell your house.
For more details on how exactly legitimate variants of off-market buyers work, go to my article on the subject here, but if you're a prospective buyer, consider the ethical implications I mention in the first section, titled, "#1 Source of Heavily Discounted Properties for Buyers, But Consider Ethics". Also, keep in mind that many off-market buyers will employ a number of predatory tactics that I do not recommend.
Is selling a home for cash a good deal?
Selling a home to a cash buyer isn't inherently good or bad by itself, though between 2 offers while a home is on the open market, if one is cash, and the other is not, and everything else about the offer is the same, the cash offer is better.
Related:
While cash offers can be great when a home is listed on the open market, a cash offer from an investor when a home isn't on the market is rarely going to be the best net option for the seller.
According to an article by Money.com, "In 2020, 89% of home sellers worked with a real estate agent to sell their property, according to NAR. For most homeowners, this route is the best way to fetch top dollar for their home — especially in today's real estate market.
Simply put, there are fewer homes on the market right now, so competition is high and many sellers are raking in offers. In most cases, settling for a lower price from an investor just doesn’t make sense."
The Bait
On the surface, "we buy houses" buyers might offer promises like a "fair" offer or a "full price" offer. They talk about how they can close quickly, can pay cash, and how no commissions to real estate agents are involved.
"Pernicious flippers, wholesale buyers, and institutional homebuyers may target low-information homeowners with offers of quick cash without inspections, or even before the homeowner has made the decision to sell their home. This sort of information asymmetry is bad for owners, who may be leaving money on the table (pg 4 of Drexel.edu report)."
More of the bait:
Quick sales (see other section below)
"Guaranteed sale" (if a cash buyer, not a wholesaler typically)
These guarantees are able to be made because they are offering a low enough amount to you that they should have plenty of "buffer room" if they don't sell for what they expect they will. It's quite rare for these amounts to be higher than the net amount you'd receive with a listing with an agent. They may pitch the idea as "insurance", but while insurance companies are regulated in their profit margins, in most wholesaler situations, there are no or very limited legal regulations on their profit margins.
""No closing costs""
No closing costs for the seller doesn't mean much net when it just means a lower offer price by a greater amount than the closing costs saved in >95% of the time and when closing costs are paid at closing anyways typically with sale proceeds.
While not typical, in some cases they may offer a price that seems reasonable
In some cases, a buyer may make one offer, then after the inspection, drop that amount by 10's of thousands of dollars or request a long laundry list of repairs.
In other cases, what seems reasonable to you (i.e. what you paid for it, the Zestimate, or the tax assessment) could be far less than what it's worth due to factors like appreciation & improvements.
"No commissions"
These claims are made possible by how low they're making an offer for, even if they plan to pay a typical commission to an agent in the process of selling the home themselves. While technically true, it's misleading.
The Catch: Introduction, Including Investor Profit Margin Goals & Costs
In order for it to be worth a "we buy houses" buyer to purchase your home, they can't buy it for the amount that your home is worth (nor even that amount minus the real estate commissions you'd typically be paying, because then they would still be negative on profits too often due to closing costs present when buying and selling, especially if your home is in good shape). They aren't typically looking to live in the property. It took them too many times of people saying "no" to them or those they've hired with all the time and money involved in that for them to get such paltry discounts. If they were to do that, they'd go out of business very quickly.
The 70% Rule
With house flippers (cash buyers) and wholesalers, it's not uncommon for them to follow "The 70% rule", where the cost of the home plus the cost of repairs to the home should be not any more than 70% of the after repair value of the home. Different investors use different amounts, with some using the similar 75% rule that follows the same principles, but is better applied at a higher price point.
Related: Financing Repairs/Renovations Prior to Sale
MasterClass Article: 70% Rule Explained: How the 70% Rule Works in Home Buying
There are 2 primary categories of off-market buyers:
Wholesalers
Flippers
The Catch: Contingencies & Clauses
There are numerous contingencies that off-market purchasers might use as well as other tactics that you might not be familiar with even if you've sold your home before on the open market.
Assignment Contracts - These are where instead of the person making you an offer buys your home, instead, the offer they make is an assignment contract, where they can offload the home to another buyer without the one making you an offer initially ever actually closing on your home. If the other buyers are allowed to do showings, their margins will typically be higher, and they may be willing to offer you more, but even then, as with other off-market sales, your net will typically be significantly less than if you were to sell on the open market.
Inspection Contingencies - While these are often used with a typical buyer, with an off-market investor, inspection contingencies are much more likely to yield what would typically be considered unreasonable requests, such as extensive repair requests that are unwarranted considering the cost of the home &/or a drastic price reduction. With an off-market seller not being represented by a listing agent typically, they won't typically have someone who can call out that which would be considered an unreasonable request. That means that an off-market investor has a greater ability than typical to argue a seller down on price or significant concessions after initial contract ratification.
Financing Contingency - While these are often used with a typical buyer, with a wholesaler, it can mean that if a wholesaler isn't able to achieve an amount within the range of profit margins that they initially were hoping for with another buyer, they are able to get out of the contract with you.
Per Propstream, additional contingencies & other elements may include but are not limited to:
"Insurance contingency. This protects the buyer if the property is deemed uninsurable (e.g., due to major structural issues or unpermitted renovations).
Marketable title option. This lets the buyer terminate the contract if the seller can’t deliver a clear title.
Risk of loss and damage. This prevents the buyer from liability for property damage while under contract.
Marketing period. This stipulates how long the wholesaler has to find an investor to assume the purchase agreement before the contract becomes void.
Adjustment clauses. These set the terms for adjusting various aspects of the deal (e.g., the price or closing date) in the event of unpredictable circumstances (e.g., a natural disaster or law change).
Default clauses. These detail the course of action if either party breaks their end of the agreement."
The Catch: Wholesalers
Wholesalers:
Often investors using these tactics will be employing a "wholesaling" tactic, where they will be selling your home to someone else by assigning the contract to them. Often wholesale assignment contracts include contingencies about the fact that if they don't sell for a certain amount where they would make a profit, they aren't obligated to follow through with the deal.
"Wholesalers don’t tell homeowners about the city’s property tax relief programs (1), repair programs (2), or housing counselors and legal services available to homeowners in foreclosure, and their pitches for a quick and easy cash sale exacerbate a wave of Black homeowners being forced out of cities due to poverty, job loss, and foreclosure. These families not only lose their homes but also whatever equity they have managed to build up over the years (Whyy)."
1. Tax relief programs: See "RE Taxes" in the spreadsheet linked here for SE VA cities/counties, then scroll over to the various relief/deferral columns.
2. Non-Profit & Government Assistance with Home Repairs
Wholesalers then have a few options to offload your property to make some money off of your loss:
1. Sell to another buyer off-market & don't list the property on MLS (typically lowest profits for them and least work for them). They will have a small pool of buyers that they will market to, primarily investors themselves who don't want to put the time or money into finding wholesale deals. The marketing is typically relatively poor, & the buyers may or may not be able to see the property in person before getting assigned the contract. The person they are looking to sell to is also someone who is looking for a deal. The buyers they are catering to typically won't be willing to pay what your home is really worth either. This method is likely the most common for wholesalers. Wholesalers can execute these steps with no funds from them involved if desired.
2. Put your assigned property on MLS with a heavily discounted agent with typically worse marketing & other limited services, but typically with a 2.5-3% buyer's agent commission being offered by the wholesaler, with higher buyer's agent commissions offered statistically yielding higher prices by increasing demand and buyer pool.
3. Put your property on MLS with an agent that markets well while having a competitive listing side commission considering what the agent offers, with a buyer's agent commission. This method adds time for them, but they already spent a lot of time and likely a lot of money just to get your home under assignment contract at the price they got it for. Their eventual profits with this approach can be the highest among wholesalers.
The Catch: Cash Buyers
With cash buyers, their risks are higher if they don't have a financing contingency, so they may need to offer less than a wholesaler using a financing contingency. These buyers could close on your home, do some repairs, and then sell for a significant profit. It takes more work than wholesalers, but the profits are typically higher.
What if You Need to Sell Quickly?
If you're selling off-market to a wholesaler with an assignment contract contingent on them finding another buyer, you could be looking at months of being locked into an agreement that was never good to begin with in the vast majority of cases. Your home may never even sell with them in that case, and often they'll be able to get out of it at no cost to them, while a market shift and otherwise could have a big impact on you.
You can still sell quickly on market. 1 of the ways is by selling as is. Ultimately you can still sell on market to a cash buyer requiring a quick closing if needed. Even on-market closings can close in under 10 days from contract ratification, while it's not unusual for a cash offer off-market to include a 10-day home inspection contingency.
What if Your Home Needs Work?
You can sell as is. Buyers have options other than a fully cash purchase even if a property doesn't meet appraisal standards for a traditional loan in many cases.
Sometimes homes will be listed as not allowing FHA or VA loans. In more rare cases, they will be listed as not allowing anything but fixer upper loans or cash, or just cash.
When even a traditional loan wouldn't do without additional help, escrow holdbacks are an option with many lenders if it's not a big repair (i.e. less than $8k) needed for a property to meet appraisal standards and if the buyer has the funds for the repair plus 50% of an estimate.
Fixer-upper loans are also an option, with fixer-upper variants of loan types like USDA, VA, FHA, conventional, and more available.
Especially in a multiple-offer scenario on the open market, it's not uncommon to see no appraisal required, often with cash buyers, and sometimes with buyers using conventional financing with 20+% down.
There are also a lot more cash buyers than many are aware of, with around 1/3 of purchases being in cash. Cash buyers buy homes on the open market as well as off market. On the open market, I've assisted buyers purchasing in cash and sellers selling to those purchasing in cash.
If selling as is, just keep in mind that your profits will typically be better if you have time is to get it cleaned up, decluttered, & fixed up before listing it, and many are unaware of some of the options to finance repairs even if you have no cash.
Seller options for repairs if they don't have the capital:
For those who can't afford appraisal-required repairs or other repairs, some contractors are willing to be paid at closing.
For those with decent credit and income with no $, there are also a lot of 0% APR credit card offers as well as 0% or low % balance transfer offers.
Home equity lines of credit are also an option in some cases.
A personal loan is a viable option in some cases, especially for those with good credit and a good debt-to-income ratio
In some cases, there are free or greatly discounted programs available to sellers to have help for their home's repair, often subsidized by the government &/or ran by a non-profit. The lower the income the seller, the more likely that they will qualify.
For more details, see: Financing Repairs/Renovations Prior to Sale
Don't Let Them In Your Home Unless Your Property is Listed Well Already
Allowing someone in your home could trigger them making a "final offer" with a tight deadline or using another pressure sales tactic that you may have difficulty overcoming.
If you sign something with a cash buyer or wholesaler, it may be too late, but it's still not a bad idea to check on some things. If they are a wholesaler, first check to see if the person you signed with is a real estate agent. Per HB 917, wholesalers in VA are required to be real estate agents if they deal with assignment contracts on 2 or more occasions in any 12-month period.
Be Familiar with Ways to Keep Your Home if You're Struggling with Payments
Many owners that sell to these engaged in "patterns of parasitic purchasing" (pg 4) according to the Drexel research. In order to avoid that, consider ways to help if you're struggling with payments, such as:
Listing on the open market as is if you have figured out where you will go (Related: Should You Sell As Is? )
Listing on the open market after repairs if you have figured out where you will go in order to achieve the highest net profits (Related: $ for Repairs/Renovations Paid at Closing )
Renting out rooms of your home to others if you have nowhere to go
How Often Do People Sell to an Investor?
"The share of homes that sold from a homeowner to an investor ranged from 11.5% in Jacksonville to 14.9% in Philadelphia(Drexel.edu)." The total sales to investors (including when agents are involved) of single-family homes in 2020-2021 ranged from 19.3% of sales in Richmond, VA to about a quarter of all sales in Philadelphia and Jacksonville/Duval County FL. That means that more than half of investor purchases in those cities are being sold with no agent to protect a seller from predatory practices.
Related:
4. Tax relief programs: Tax Relief & Deferral on the Virginia Peninsula of SE VA
See also "RE Taxes" in the spreadsheet linked here for SE VA cities/counties, then scroll over to the various relief/deferral columns.
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